Vincente Minnelli's A Matter of Time (1976) starring Ingrid Bergman, Charles Boyer and Liza Minnelli, which was budgeted at $5 million.32
Although the company's first steps towards expansion were successful, its march towards the industry's major league was severely curtailed in the final months of 1976, when the US Treasury Department repealed the federal income tax shelters that the Nixon administration had created in 1971 to stimulate film production after the recession.33 These credits allowed corporations significant write-offs in their income tax bills, should they invest part of their corporate income in film production.34 This meant that a corporation could reduce its income tax bill and stand to gain profits as well, should the film it invested in became profitable. Despite their indisputable contribution to the regeneration of the film industry (it was estimated that tax shelters became responsible for an influx of more than $100 million outside investment in film production during the first half of the 1970s), tax credits were placed under pressure when strong allegations that they were used for the financing of pornographic films surfaced in the mid-1970s.35 The Tax Reform Act of 1976 eliminated the shelters and closed this important revenue of film financing to the independents.
As the conglomerated majors had by that time fully bounced back from the recession, the elimination of tax credits hit mostly the low-end independents, even the most successful ones, like AIP. To continue operating efficiently at a time when the company's product was becoming increasingly expensive both in terms of production and, especially, distribution costs, Arkoff sought tax shelters and subsidies outside the United States, in particular in Germany, Canada and Australia.36 This move became especially important as AIP's marketing costs had reached unprecedented levels and the company needed to keep production expenditure as low as possible.37
Despite the efforts to keep costs down while competing with the conglomerated majors, AIP had already become prisoner in the industry's irrevocable course towards star-studded films with inflated budgets. By the last month of 1977, the company was - reluctantly - prepared to finance $7-$8 million pictures such as 10 Force from Navarone (G. Hamilton, 1978; with Harrison Ford) and Meteor (Neame, 1979; with Sean Connery which ended up costing $17 million).38 To meet these demands, AIP negotiated a considerably larger line of credit from American banks (from $11 million in 1975 to $35 million in 1978).39 The company's financial results, however, hardly justified such a move. Both its profits and revenues remained stag nant in 1977 and 1978, while in 1979 AIP recorded a net loss for the first time in its history ($1.5 million).40
Not surprisingly, AIP became immediately a target for a corporate merger or takeover. Filmways, a former television production company that had successfully diversified with interests in the fields of insurance, publishing, manufacturing of electronics and television and film finance, had been following AlP's slump since the final months of 1978. Although Arkoff had treasured his independence for almost a quarter of a century and had taken in the past measures to shield AIP from hostile takeovers, this time he was ready to succumb to the need for a conglomerate parent. As he put it in October 1978, several months before the merger between AIP and Filmways: 'Responsible management must weigh the prospects of a much heavier debt burden against the better alternative of operating on a broader financial foundation. The concept of affiliation with Filmways seems to offer the more desirable option.'41
The merger, which was valued at approximately $25 million, created a stronger AIP as banks could now take into consideration Filmways' assets when arranging production loans. According to the terms of the deal, Arkoff remained AIP's chairman but he now had to report to the Filmways executive board of directors.42 Only a few months later, however, Filmways executives accused Arkoff of having overstated AIP's assets before the merger and forced him to resign. Less than a year after the merger, Filmways retired the name American International and replaced it with Filmways.43
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